RESPA violations are ramping up as both the State and Federal regulators begin to explore the practices of lender/agent relationships. Of concern to most companies and sales associates are RESPA/Section 8 violations and Fair Lending violations. Both are costly to defend and the fines for breaking these rules are escalating. We have all seen the press from the last year on marketing services agreements and how those agreements have put a couple of lenders out of business and fines assessed to Real Estate agents. In this article, I’ll discuss another hot topic about the Top 10 things you need to know before you buy a lead or participate with a referral source in lead generation.
The Top 10 Things You Need to Know When Purchasing Leads!
1. Purchasing leads can violate Fair Lending Laws if not done properly!
2. Purchasing leads in only one area of your market versus both the non-minority and minority areas can demonstrate “redlining” because you are purposefully excluding segments of your market area.
3. Conversely, buying leads in only majority minority markets and charging more than other company branches in that area for rates, points or closing costs can lead to “reverse redlining”; because you could be seen as seizing an opportunity to charge more to minority clients versus non-minority clients.
4. Buying leads that are the highest credit financial profiles versus the credit profiles that fit your underwriting guidelines can demonstrate “disparate treatment/impact”. For instance, let’s say your credit score minimum is 660 and you only buy leads at 720 or higher. This means that you are avoiding parts of your market and “cherry picking” the market. Under ECOA this practice will likely cause issues.
5. When you buy leads and do not call or email people back because you perceive the deal to be “too high maintenance” you are demonstrating Disparate Treatment. All leads, whether referral sourced or purchased should be communicated similarly. Fair treatment under ECOA never mentions that it is okay to ignore someone because you don’t want to do business with them. As professionals, we have to take the good with the bad.
6. When you purchase leads and tell someone that they should not apply because you don’t have any programs that fit their needs you demonstrate “discouragement” under ECOA. Instead, let them know what may be an issue (such as credit score) but do not discourage them from applying. Attorneys recommend this phrase “I don’t want to discourage you from applying for a loan because I am not the underwriter and do not make credit decisions for my company. However, I can tell you that your credit score is 580 and the minimum guidelines for our programs are 620. We can take your application and gather the necessary documents to send to underwriting, or I can recommend some resources (non-profit-homebuyer education) that will help you with your credit profile. Which would you prefer?”
7. Paying for a Referral Partners ad to generate leads on any platform, such as print, or the Internet is a RESPA Section 8 violation unless you have shared space equal to the percentage you are contributing. For instance, if you pay for 50% of the ad, then you must have 50% of the size of the ad. However, this just happened and was originally published by Garrett & McAuley, so you may want to reconsider your policy!
“From a friend whose bank recently went through a FDIC compliance exam: “Co-Advertising with an agent on Zillow is likely a RESPA 8 Violation. The reason is that the agent is buying the advertising and asking a loan officer to share some of the costs. On the face of it, you would think this is OK since each person is paying his fair share. The issue is that the agent is ‘buying’ the ad, and the LO’s participation is lowering the agent’s cost… and if the agent refers any clients to the LO or the LO refers any customers to the agent, it may be viewed as paying for referrals.” We know one compliance attorney who has stated that it’s a stretch by the FDIC and CFPB, but he advises staying away.”
8. Purchasing leads from lead generator aggregators is becoming dangerous territory. Here is a quote from a newsletter published by one of the leading consultant groups in the country, Garrett & McAuley, about lead purchases from these aggregators and the opinions of the examiners.
“Do you buy leads? We have a bank client going through an exam, and the examiners are saying that anyone purchasing leads from Zillow is actually paying for referrals, which is a RESPA Section 8 violation. The reason is that Zillow takes information from a customer and then directs the “lead” to one mortgage company, i.e., it’s an endorsement, which means it’s a referral. We don’t know much more than that, but be careful, and talk to your attorney if you’re buying leads.”
And from Rob Chrismans’ Newsletter we hear this:
“Jeremy Potter observes that, “There are 2 RESPA-related activities around Zillow. Lenders can purchase leads from Zillow or real estate agents on Zillow. Lenders can pay Zillow or real estate agents on Zillow for a photo and contact info on the property page…mortgage lenders and mortgage brokers advertise on Zillow. Financing is relegated to the bottom of the property page. Nevertheless, real estate agents are given top billing and often included prominently to the left or below the property information. Zillow charges, not surprisingly, for this advertising. Real estate agents often find themselves with several offers from mortgage loan originators to pay for the cost, split the cost or otherwise share in the advertising. RESPA and CFPB see the deferment of a payment that someone would otherwise have had to make as a thing of value.
So, by paying the real estate agent’s Zillow invoice, in exchange for customers (even, I suppose, potential ones), a mortgage loan originator could violate RESPA. In response, most companies that engage in this or allow their folks to do it on their own instruct employees to split the cost based on the amount of advertising – 1 agent and 1 loan officer would split 50/50. 1 agent and 3 loan officers may split it 25/25/25/25.
Someone implied that during a CFPB exam the examiner took issue with the purchase of leads from Zillow. This would be the second type of activity mentioned earlier. It is not clear whether that means purchasing Zillow leads from Zillow or purchasing Zillow leads from a real estate agent. Either way, it is a further blurring of the line between sales & marketing activity (ok under RESPA) and paying for referrals of business (not ok under RESPA). The statute has always been vague, the regulations are not much better – though they do provide for ‘bona fide services’ at ‘fair market value’ which is some standard at least, and the regulator(s) have been unwilling to go on the record with a new rule or formal interpretation. Because it’s messy, most companies trying to steer clear of regulatory risk also steer clear of any agreement that moves toward the informal line in the sand. Unfortunately, that decision puts the ‘good guys’ at a disadvantage. Without knowing the rules of the road, companies trying to follow the rules start questioning any lead buying, sales activity that comes from a referral source even if it’s a giant, general website like Zillow.”
9. Working in the “fees” for the cost to acquire a lead will likely result in pricing disparity. For instance, if you purchase leads and you are required to pay “x” if the loan goes to application or closing; you may be collecting more in fees from that consumer to cover the cost. Without strong business justification (and note that this is tough to defend or litigate) pricing disparity between financially similar clients may be occurring. After all, you are not adding the “cost to market” to referral sources such as real estate agents, are you?